Distinguishing cases where bankruptcy courts in North Carolina and New York wouldn’t permit chapter 11 debtors to manufacture venue on the eve of filing, a bankruptcy court in Delaware allowed the largest unsecured creditor to take over the debtor and manufacture venue not long before filing.

The debtor was a midsized, regional, independent mortgage company headquartered in Arizona, where it was incorporated. The owners of the debtor’s shares had pledged the common and preferred stock to the prepetition lender.

The lender created a holding company and an intermediate holding company, both Delaware LLCs. After the debtor defaulted on the loan agreement, the lender transferred all of its rights under the pledge agreement to the intermediate holding company, making the intermediate holding company the holder of all of the debtor’s common stock. The transfer of the common stock to the Delaware LLC occurred two months after the Delaware LLC had been formed.

The lender retained ownership of the preferred stock.

Now in control, the lender caused the removal of the debtor’s officers and directors and installed new directors and a chief restructuring officer.

Two months after it had been created, the intermediate holding company (a Delaware LLC) filed a chapter 11 petition in Delaware. As an affiliate of the Delaware LLC, the debtor filed a chapter 11 petition in Delaware.

The Location of Creditors

In his October 25 opinion, Bankruptcy Judge Thomas M. Horan of Delaware said that seven of the debtor’s “top” 30 creditors were in Arizona. Based in New York, the lender was the largest creditor, holding $23 million in secured and unsecured debt.

The debtor has 27 other secured creditors and 240 unsecured creditors spread around the U.S. The debtor was headquartered in Arizona, where the books and records are located.

The chapter 11 filing was two months after the Delaware LLCs had been created. In chapter 11, Judge Horan said that the debtor had not yet received final approval of financing and use of cash collateral. He also said that the debtor filed a plan and disclosure statement “without input from the Committee.”

The Venue Motion

The official unsecured creditors’ committee and the U.S. Trustee filed a motion to transfer venue to Arizona under 28 U.S.C. § 1412. It provides that a “district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.”

Judge Horan explained that venue was proper in Delaware under 28 U.S.C. § 1408(1), because the first-to-file LLC was domiciled in Delaware. As an affiliate of the LLC, the debtor’s venue in Delaware was proper under 28 U.S.C. § 1408(2).

According to Judge Horan, the movants were urging him to transfer venue under the “interest of justice” prong of Section 1412. In deciding the motion, he said that the court has “broad discretion” and generally gives “great weight” to the debtor’s choice of venue, when venue is proper.

According to Judge Horan, the movants argued that “the Debtors ‘manufactured venue’ in Delaware when [the Delaware LLC] was incorporated in Delaware less than two months before the Petition Date.” The movants, he said, relied principally on In re Patriot Coal Corp., 482 B.R. 718 (Bankr. S.D.N.Y. 2012), and In re LTL Mgmt. LLC, 21-30589, 2021 Bankr. LEXIS 3155 (Bankr. W.D.N.C. Nov. 16, 2021). 

In Patriot Coal, the New York bankruptcy court transferred venue to Missouri, where the debtor was headquartered. In LTL, the North Carolina court transferred venue to New Jersey, where the debtor was located.

Judge Horan said that both cases were distinguishable. In both, the debtors were newly created in their favored venue not long before bankruptcy. Regarding LTL, he said that the debtor “manufactured” venue in North Carolina “to obtain favorable dismissal standards” under Fourth Circuit law.

In Patriot Coal and LTL, Judge Horan said that “the debtors themselves formed or reincorporated entities into their desired venue.” In the cases before him, he said that the lender’s creation of the first-to-file entity “to hold its acquired stock does not represent the brazen manipulation of venue seen in Patriot Coal and LTL.”

The movants also argued that the debtor’s choice of venue should be given no deference, because the lender selected venue, not the debtor. Judge Horan countered by noting how the chief restructuring officer “testified that there was nothing unusual or surprising about filing in Delaware.” In addition, he said that the debtor’s board “independently” selected Delaware as the venue.

Other factors regarding venue were “generally” neutral, Judge Horan said. The debtor’s operations being in Arizona “slightly favors transfer,” but “Delaware has its own interest in these cases because of [the LLC’s] domicile here,” he said.

Judge Horan denied the venue motion, saying that the movants had not sustained their burden of proof by a preponderance of the evidence that venue should be transferred to Arizona.